There are at least three facts that have become well entrenched in the pallet recycling world — a growing demand, a tight supply of incoming cores, and shrinking margins as the industry continues to mature. One of these “given” facts, that of a shrinking core supply, suddenly finds itself being questioned. Is the supply picture changing? Will any change that is occurring reverse its posture in the near future? A second fact, that of a growing demand, is beginning to be questioned by a few as well.
I was approached by a major pallet recycler and asked to address these subjects at the NWPCA Recycling Meeting, held October 12-14, 2000 in Denver, Colo. While I had heard rumblings about the changing core supply landscape, I had no solid information to process. So, I quickly put together a survey that was mailed or faxed to all NWPCA recycling members, all recyclers who were preregistered at that time for the meeting, and all Pallet Profile readers. The cost of the survey and effort put into it was subsidized by the Pallet Profile. In addition to this Enterprise article, material from this survey was published in the Pallet Profile Weekly on October 20 and given in a presentation by me at the NWPCA Recycling Meeting in Denver.
Nobody has all the answers, not every recycler agrees about what is happening in the market, and different conditions exist in different markets. In spite of these limitations, our survey results reflect some light on the key questions about the demand for recycled pallets and the supply of incoming pallet cores. For some results, survey responses were divided into two groups – those companies that have over 250,000 incoming annual cores (43 responses) and those with 250,000 or fewer incoming cores (22 responses).
Recycled Demand
With the exception of brief recession interruptions, the demand for wooden pallets has enjoyed virtually constant growth since the industry’s inception during World War II. The demand growth for new wooden pallets was somewhat subdued during the 90s due to the growth of used pallet acceptance. Since recycled or used pallet demand seemed to grow virtually unchecked during the last decade, recyclers have become accustomed to this kind of market condition.
Past Pallet Profile recycle surveys during the 90s have registered a consistent theme of recycled pallet growth. Combining increases and decreases in annual growth, average growth rates in the neighborhood of 20% were typical throughout the 90s (growth averages of 18.2% in 1997, 20.0% in 1996, 13.4% in 1995, 26% in 1994, 20% in 1993, and 20% in 1992). Adjusting for a few exceptionally large outliers, this new survey reflects a 10.0% annual growth over the past year (Table 1). While this is still healthy, it does look subdued compared to previous growth rates in the neighborhood of 20%.
It appears that pallet recycling’s growth is beginning to level out somewhat. This is not surprising because the combination of available incoming core supplies and conversion of customers from new to recycled pallets has to eventually hit some kind of a market level. Continued growth due to the economy could not support the kind of numbers our industry has experienced, so an eventual leveling out has to happen. We may be hitting that point in the maturity process of the pallet recycling industry.
Another measure of how far recyclers have come is the huge growth in the number of incoming cores into the companies that returned surveys (Table 2). Previous surveys used 200,000 incoming cores as the break point between the smaller and larger recyclers (this year I used 250,000). The 1996 and 1997 recycling surveys reported approximately 470,000 incoming cores (mean average) in the larger groups for both years. This survey had fewer respondents due to the more restricted time to solicit data, but that factor in no way could account for the jump all the way to 865,000 as the mean average number of incoming cores for the larger company group (42 companies). A similar growth was reflected in the smaller company numbers. Where the 1996 and 1997 surveys had averaged in the neighborhood of 60,000 incoming cores per smaller company, this year’s survey jumped to 126,000. Even though I raised the upper limit to 250,000 cores, the number of smaller companies was a smaller percentage of responses than in previous surveys. Part of this was due to the differences in data sampling, but part was due to industry growth.
Incoming Cores
The driving reason for this survey was the growing number of recycler comments that core supplies are much easier to find. Not very long ago, tight core supplies were a “given” condition of the recycling business. That has changed, with some dramatic shifts taking place in the last three to six months. A growing number of recyclers are reporting that cores are much easier to obtain. A few have indicated a concern that core supplies might get loose enough to cause core prices to fall, which could create problems with inventory values.
Not all recyclers have experienced a major loosening of core supplies. Those who have seen core supplies escalate cite various reasons, but the most common reason I have heard is related to a significant increase in the number of white pallets coming out of DCs, particularly Wal-Marts and other major mass merchandising companies like K-Mart, Costco, Sams, etc. Out of the 64 people who responded (Table 3) to the question that relates to a change in the incoming quantity of white cores, 16 (25%) reported seeing no change in core availability over the past year. While 32 (50%) have experienced an increase in white core supplies, 16 (25%) report having seen a decrease. Average increases and decreases tend to be around 20%, but the weighted average of all experiences is for increases (7.6% increase for larger companies and 1.3% for smaller companies), with a combined sample increase of 5.5%.
White pallet inventories are often closely related to core supplies. More larger pallet companies typically experienced increases in white pallet inventories, while smaller companies are about split on inventory changes. (See Table 4) Since core supplies tend to be more available, it is not surprising that the industry overall is experiencing some white pallet inventory increases. Survey participants in general tended to report seeing inventory increases in competitors’ yards. Larger recyclers reported twice as many seeing inventory increases (24 vs. 11) when compared to seeing either no change or inventory decreases. Smaller recyclers were evenly split.
When asked to rank four potential factors that could be causing an increase in white core inventories, two factors brought major response. People seemed to be about split between the impact of white pallets coming out of Chep operated Wal-Mart DCs and increased volumes of white pallets coming from other DCs and sources. A decrease in the demand for white pallets was not chosen nearly as often as being a significant factor in white pallet inventory increases, although some people did indicate that their pallet demand has been off a little. The fourth reason sometimes cited was improved white core inventories because of new sources.
Larger recyclers are more likely to service major distribution centers and hence get more of their cores from this source (Table 5). Smaller recyclers purchase a higher percentage of their pallets from independent contractors. None of the numbers displayed on this table seem particularly surprising.
Pallet and Core Pricing
More respondents reported increasing core prices versus decreasing prices (Table 6). The mean core price was $1.84 with the median range being $1.75 to $2.00. Those who are seeing core prices go higher tend to outnumber those seeing them lower by about three to one.
There is very little difference in reported #1 and #2 GMA pallet prices according to respondent sizes (Table 7). However, some larger companies reported that pallet prices are increasing, while no smaller companies reported seeing higher prices. It appears that recyclers expect to see GMA prices decrease if they move at all. Note that this attitude prevails when new GMA prices have upward pressure due to higher hardwood prices.
A shift seems to be toward a heavier
#2 pallet demand versus a #1 demand (Table 8).
Pallet sales in recycling yards tend
to break down into four categories (Table 9).
About two-thirds of respondents reported a change in the number of competitors in the last two years (43 said yes and 21 said no). I just assumed that this meant more competitors until one respondent wrote in that the number had decreased.
Impact of Chep Pallets
The number one topic of discussion among leaders in the recycling arena would have to be Chep. Thus, I was somewhat surprised at some of the responses to questions involving Chep pallets. About one out of ten respondents report that they operate at least one Chep depot (6 do while 58 do not). The number of Chep pallets reportedly coming into recycling yards is less than I would have guessed. Since they tend to accumulate instead of flow through, they present a bigger problem than their volumes might make one suspect. After eliminating two extreme answers, the average number of Chep blue pallets a month coming onto the larger recycling yards was only 417 (5000 per year) while the number of incoming pallet cores averaged about 865,000 a year. This averages out to be about three Chep pallets per trailer load. The smaller companies reported about 91 Chep pallets a month (1092 per year) compared to an annual flow of about 126,000 incoming cores. These numbers work out to be fairly close to the same percentages (0.57% versus 0.87%).
According to respondents, the breakdown of incoming cores appears in Table 10. Note that Chep and other proprietary pallets tend to represent between 2% and 3%, considerably more than the numbers presented above. Part of this discrepancy probably rests upon the way the questions were asked and what kind of records people keep. While there are other proprietary pallets than Chep pallets, they probably make up the majority in most recycling yards.
More recyclers report an increase in the number of Chep pallets coming onto their yards, which is not surprising since the Chep pool continues to grow each year. The larger recyclers reported an overall average increase of 19.4%, while the smaller companies reported a more modest 5.1% (Table 11).
Certainly one of the most sensitive recycling issues in our industry’s history has to be what recyclers should do with Chep pallets. I asked what respondents do with the Chep pallets that end up on their yard. The average responses appear in Table 12. There is some question whether or not respondents are likely to answer honestly, but the responses provide interesting reading. About 45% are returned to Chep with or without compensation. Between 25% and 30% go to somebody other than Chep (again with or without compensation). Of course most of these get back to Chep sooner or later. The other 25% to 30% are either dismantled, ground into fiber, or stored. This represents most of the Chep pallets that go through recycling yards but are not likely to return to service as Chep pallets.
What impact will dock sweeps (including Chep’s) have on future core supplies? They appear to be putting more cores into the market right now. In spite of the current core cost trend, some recycling leaders are concerned that core prices will drop if dock sweeps continue to expand their influence toward greater core supplies. Continued Chep expansion may reduce the demand for GMAs in the future, causing recycled pallet prices to drop. We may be witnessing the beginning of a major shift in the structure of the recycled pallet markets. There seems to be no doubt that Chep’s impact continues to spread. Stay alert. Keep tuned to make the kinds of changes and adjustments that the dynamic market will require.
